Top execs from Constellation Brands Beer Div (CBBD) continued to celebrate 2014 results with analysts at separate “bullish two-hour” mtg with analysts at Beer Biz Daily Summit, as Dara Mohsenian at Morgan Stanley put it.  Two key points from several analyst reports.  First, CBBD depletions jumped 14% in Dec, actually building momentum and helped by extra selling day, and while distribs built inventory at the end of the yr, as Constellation execs said on conference call last week.  Second, margin expansion for beer biz will be “back end loaded” more toward fiscal yr 2017 than fiscal 2016, again echoing Constellation execs last week.  New Corona can packaging rolling in Mar, wrote Judy Hong at Goldman Sachs  

Responding to recent Express item citing memo from MC’s Kevin Doyle on AB placing Shock Top in Olive Garden nationwide (Jan 2 Express), AB veep of natl accounts Chris Williams said: "Anheuser-Busch is proud to have been selected by Olive Garden as their choice in a Belgian-style wheat beer. Retailers are recognizing the great advantages and value in Shock Top as a high quality brand, including the full marketing support for the brand provided by A-B and its wholesalers. A-B made a competitive, fair proposal (not a ‘bid’) for Shock Top to become the choice of Olive Garden and will continue to be a strong competitor in the critical on-premise segment.”

The writing was perhaps on the wall when AB announced deal to buy another Oreg craft brewer 10 Barrel late last yr. How could Ninkasi expect to get same focus as 10 Barrel in AB-owned distribs in Wash and Oreg? And so predictably enuf, now Ninkasi in process of moving in state of Wash from AB branch in Seattle, reportedly mostly to Odom. And it is working on separating from AB branch in Eugene, Oreg as well. Ninkasi had no comment at presstime.

AB issued statement from region veep David Craig: AB’s “company-owned distributors in Eugene, Ore., and Renton, Wash., have successfully carried Ninkasi Brewing Company’s beers since 2012. Ninkasi has indicated they would like to go in a different direction with their distribution partners moving forward, and we are working with them to accomplish that.”

Recall, AB branch in Seattle also lost Firestone Walker and Iron Hill. And later this yr, it will lose Monster, reportedly as much as 500,000 cases in Seattle. If it were ever to lose Constellation brands (remember DoJ granted Constellation right to pull them for 2-yr window as part of deal), AB’s branch in Seattle would look radically different than when AB bought K&L just a few yrs ago. 

Just hours after we went to press yesterday with news of Ninkasi moves, Ninkasi formally announced that it would move from AB branch in Wash on Feb 9 and from AB branch in Oreg on Jan 26.  Ninkasi going with Odom Corp in Wash, as Express noted.  And Bigfoot Beverage “will distribute Ninkasi throughout Downstate Oregon,” said Ninkasi.  “This move marks Ninkasi’s commitment to partnering with like-minded, craft-focused distributors in the region.” Co-founder Nikos Ridge said: “We are committed to being an independent and locally owned craft brewery, and feel we will be better aligned long term with independent and locally-owned wholesalers.”  Recall, Bigfoot is craft-centric distrib founded by Pepsi bottler. 

Coors Peak Copper Lager, a “100% gluten free beer,” will be available in Portland, Oreg and Seattle soon, reports Crain’s Chicago Biz and Ad Age, citing memo to distribs going out today.  There are a handful of gluten-free craft brands, AB has had Redbridge for yrs and Craft Brew Alliance’s Omission has had some success in the space.  MC has modest plan for now: “the brewer is not eyeing national distribution at the moment,” according to Crain’s, adding MC statement to distribs: “Given production limitations, there are currently no plans to expand beyond [Seattle and Portland].”   To get gluten-free, MC replaced barley with brown rice and protein from peas.

With craft already at 31 share of “units” (volume) in GuestMetrics on-premise data, growth getting tuffer to come by, GM ceo Bill Pecoriello showed at Beer Business Daily Summit. Total beer biz down 3.5% for yr across GuestMetrics universe of 15,000 on-premise accounts (GM will expand to 25,000 accounts in 2015). So craft still gained nearly 2 share (1.9), but craft volume only up 2.9%, Bill pointed out. What’s more, craft share gains slowed from 2.2 share in Jan 2014 to 1.2 share in Dec 2014. And the top 20 craft brand families, 35.5% of segment, were “basically flat,” up just 0.3%, Bill said.

Craft’s Long Tail Got Longer; “A Lot of Churn”GuestMetrics tracked over 1700 brewers and 10,796 beer brands in all. Long tail provided nearly all craft’s growth. Up 4.4%. But craft growth not the most efficient. There’s “a lot of churn going on,” noted Bill. Number of craft beer brands climbed 19.6% in 2014, but total craft volume up just 2.9%. That meant “volume and $$ not keeping up with the number of brands,” i.e. each craft beer brand averaged less sales. Contrast what’s happening in craft beer to what’s happening in craft spirits. Craft spirits volume up 50%, but # of brands up just 15%. Each brand sold more. Craft spirits gained 2 share to 6 in GM data, still significantly smaller than craft share of beer.

Spirits Own Late Night; Angry Orchard Top Brand Share Gainer Spirits overall continued to outperform beer, especially late night (GuestMetrics breaks out sales by day parts). Spirits captured fully 59 share of the late night purchase occasions. In all, beer lost 0.6 share of units, but just 0.4 of $$ in 2014. That’s because beer also had the biggest avg price increase, up 3.6% on price/mix, compared to spirits up 2.2% and wine price/mix up 1.5%. Also gotta note: cider gained 0.5 share within beer and Angry Orchard by far the biggest brand share gainer on-premise of any beer or cider brand, gaining more share than next 3 biggest gainers combined. Wow!

That didn’t take long.  Distribs in Ky going for broke.  As expected, legislation intro’d in Ky House today, by the Speaker, that in effect bans brewery branches and makes AB get out of middle tier.  Language specifies that “no person holding license” of one kind – like a brewer – “shall apply for or hold a license of any other kind,” like a wholesaler.  No place in bill are AB branches in Louisville or Owensboro grandfathered. 

AB has already responded, saying it “opposes this legislation because it represents unnecessary government intervention in the free market and places restrictions on competition in the distribution tier.  Even more troubling is the negative impact this bill would have on the outside investment that Kentucky needs to grow its economy and create jobs.”  AB points out Ky distribs system has “worked well for decades and doesn’t need fixing. It provides balance between all stakeholders…and allows brewers to have a reasonable say in how their brands get to market.”  Points out again that AB has operated as distrib in Ky for almost 40 yrs and contributed to economy.  “It’s unfortunate that a small number of special interests are seeking to manipulate the political system to alter this long-standing balance and obtain competitive advantages at the expense of others…. This special interest legislation is nothing short of an attack on a responsible corporate citizen.” 

A group called KEG that represents Ky craft brewers, distribs and retailers expressed thanks to “Speaker Stumbo for his sponsorship” of bill and making this issue a “priority.”  “With local jobs on the line, independent beer distributors, craft brewers, and retailers agree that our legislature should have a public debate concerning the threat of massive monopolistic brewers owning or having financial interest in distribution companies.”   Distrib jobs are “at risk” from big brewers buying indie distribs, sez KEG, “and in turn distributing solely their own portfolio of products.”  Since 2010, 7 states have barred branches, KEG notes, and Ky already bars vintners and distillers from having distrib license.  Meanwhile, we hear Tenn distribs will pursue similar legislation.

In our Craft Brew News publication, we sometimes publish 2  different guest columnists with vast industry experience, under pseudonyms derived from the ancient Greeks; Nestor and Diogenes.  Nestor recently wrote an interesting column that seemed to fit our Express audience more than our CBN one.  And so we publish it here.

By Nestor

“Malt beverage”.   We have all seen this term many times.  It is an ingredient/production concept.  It is also a tax concept.   Bud is a malt beverage.  So is Mike’s Harder Lemonade.  And Redd’s Apple Ale.  And so on.   What about cider?  Technically, it is not a malt beverage. But from  liquid, packaging, and distribution standpoints, it sure acts like a malt beverage. Has similar alcohol content, comes in the same sorts of containers, and is handled by beer wholesalers (who put it on the same trucks and take it to the same retailers as their malt beverage sku’s), I am going to include it in this rant.  Which begins now.

Post World War II and until fairly recently,  malt beverages in the US were by and large limited to lager beers and to “malt liquors” (referred to as such because you could not call high-abv malt beverages  “beer” in some states). 

This situation has changed.  In several ways.  Radically.  For the good?  Let’s discuss.

First came craft beers.  The craft segment started slowly, but just look at it now.  Large.  International.  Thriving.  Wealth-creating.  Second came FMB’s (or  PAB’s or malternatives or alcopops;  lots of names perhaps because they do not have a trade association), which took off when wine cooler producers realized that paying lower excise taxes was an excellent idea.  And that selling malt beverage versions of their leading liquor brands was also an excellent idea. You can insert your own obligatory belittling comment about Zima here.  But Smirnoff Ice was no joke.  It was intended (and seemingly successfully functioned ) as an entrée to the country’s largest spirit brand.

Back to craft beers.  After a couple of decades of style and brand proliferation, crafts came to the

conclusion that they had to move to massive brand proliferation because they had created a monster of sorts.  Consumers  were demanding new variations daily .  Retailers made it clear that they would take new brands in order to satisfy these consumer demands.

First there were some more new styles.  But it turns out that there are a finite number of different styles unless you start attributing some to the Aztecs and Mesopotamians.   And now just about everyone has seasonals.  But this gambit is limited by the fact that there are a statutory number of seasons.  Then there were new IPA’s differentiated by alcohol levels or by perhaps debatable regional origins or by clever names.  But there turn out to be only so many differentiating alcohol levels; only so many regional roots;  so many cute or semi-obscene names for IPA’s.

So what’s a brewer to do?  Well, it hasn’t happened yet (unless you count non-crafts like AB, MC, and Boston Beverage), but I’ll be surprised if more brewers don’t turn to FMB’s.  Why not be like Mike’s?  Freed from the limitations of beer, you can concoct endless variants (though I still worry about Kumquat-a-Rita).  And why not ciders, which can be made at various alcohol levels and taste profiles; have good appeal to women; and open up a brand new lexicon of clever names?

But is all this good for the industry?

Well, the easy short-term answer is “yes” (or “of course, dummy”).  These products attract young

drinkers, especially female young drinkers,  to the malt beverage category.  They take volume and share away from spirits and wines (or at least staunch the bleeding).  Margins are quite good.  Executive bonuses are preserved.  And competitors are doing it; it would be foolish to abstain.

Hard to quarrel with these cogent points.  Unless you take the longer view, which seems to be decidedly out of fashion. As Keynes put it, “in the long run, we are all dead.”

But we ancient Greeks are rather fond of considering the long run.  So let us keep the question on the table.  Is all this emphasis on non-beers good for beer?  What happens to beer after we increasingly drive drinkers to very unbeer-like liquids?  Aren’t we teaching young consumers to drink other forms of alcohol?  As they get older and more affluent, won’t they be more disposed to move to the real spirit and wine liquids?  Won’t they move from ‘Rita’s “margaritas with a twist” to the real deal?

 Diageo just introduced Crown Royal Real Apple. 

It is hard for me to believe that what happens is going to be good for beer and for companies that, whether they have significant FMB and cider volume or not, are still reliant upon beer (Constellation may not be part of this group; according to ownership, they are in the Total Beverage Alcohol business.  Besides they have an enduring demographic tailwind). 

Malt beverage volumes are basically flat.  Beer volumes are down.  It’s hard not to be concerned if you care about the future.  Let’s review in five years or so. Maybe sooner.

Optimism about Constellation’s future prospects and share price grew among most analysts after Nov qtr report and conference call yesterday, mostly driven by that “momentum” in beer biz.  Indeed, Judy Hong at Goldman Sachs, Dara Mohsenian at Morgan Stanley, Mark Swartzberg at Stifel and Robert Ottenstein at Evercore ISI each raised price target for STZ shares, tho to very different levels, ranging from $122 to $135/share.  After another 4%+ pop yesterday STZ now trading at $107.  Most see key operating margins expanding in beer biz, given growth prospects and getting control of glass, etc.  “STZ shares higher?  No Problemo,” chimed in Nik Modi of RBC Capital.  One of most optimistic of the bunch, Nik saw share price increase yesterday as just “Phase 1” of his assessment earlier in week that Constellation would deliver better-than-expected beer growth.  And it did.

One modest outlier: Caroline Levy at CLSA.  She pointed out that in Nov qtr “beer margins dipped unexpectedly” (32.1% to 31.5%) and “we now expect them to be down for the next few quarters, as Constellation becomes self-sufficient in beer.”  She thinks road to margin gains “likely to take longer than the market expects.”  Caroline maintained her price target, but reduced STZ to underperform.  Note: in our article yesterday, we noted significant expansion in reported beer margin to 32%.  On “comparable” basis, since Constellation shared profits with Modelo in earlier period and booked profits differently, increase more like 1 point, cfo Bob Ryder said on conference call.

Let the battles begin.  The Small BREW Act was reintroduced in Congress by Reps Erik Paulsen (Minn) and Richard Neal (Mass) earlier this week.  BREW is legislation championed by Brewers Association, the small brewers assn, seeking tax relief for small brewers.  The bill has been around for the last 5 yrs, garnering many cosponsors.  But in 2015, BREW faces active opposition for the first time from the big brewers (Beer Inst) and NBWA.  Beer Inst expected to introduce its own bill shortly, based on compromise it reached with BA boardmembers last yr (ultimately kiboshed by craft brewers when BI insisted that importers be included).  So beer industry ain’t exactly on same page in halls of Congress in 2015.

In fact, rifts appear to be widening. Turns out, a number of small brewers recently resigned from Beer Institute.  Their rationale apparently is why should they pay dues and be part of assn which actively opposes BA’s #1 legislative priority.  Such key players as Boston, Sierra Nevada, Dogfish Head and Allagash (founder Rob Todd will be next chair of BA board) among those who have already resigned.  More resignations are expected.  “Both BA and BI want tax relief for small brewers,” BI prexy Jim McGreevy told INSIGHTS. “But there are some major policy problems” with BREW “that need to be addressed,” he added. “They were not being addressed until we raised them.”  Both BI and NBWA object to BA’s definition of small as 6 mil bbls. Then too, the whole issue of whether intl brewers can be left out of tax relief seems to be percolating more, with Australian Real Craft Brewers Assn recently objecting to favored treatment US small brewers get.   Will BA be able to get as much support for BREW now that there is active opposition?  Wouldn’t seem likely short-term, but some small brewers reportedly believe they can make things happen in the 114^th Congress.  Stay tuned.